The President repeats the “blank check for autos” falsehood

Kudos to the Washington Post’s Charles Lane for his column debunking the President’s recent false claim:

THE PRESIDENT: In exchange for help — see, keep in mind, that the administration before us, they had been writing some checks to the auto industry with asking nothing in return. It was just a bailout, straight — straightforward. We said we’re going to do it differently.

In exchange for help, we also demanded responsibility from the auto industry. We got the industry to retool and to restructure. We got workers and management to get together, figure out how to make yourselves more efficient.

This “asking nothing in return … It was just a bailout, straightforward” claim is false.

A brief history of this false claim

President Obama’s former CEA Chair Austan Goolsbee first made this claim in June of 2009. The rebuttal I wrote then is the most detailed and specific debunking of this claim: Dr. Goolsbee gets it wrong on the auto loans. I’ll repeat the essential elements below.

President Obama’s former Chief of Staff Rahm Emanuel repeated the false claim one year later. I responded, and Politifact rated Mr. Emanuel’s claim as false.

In September 2010 President Obama made this same claim. The Associated Press responded, demonstrating that the claim was wrong without explicitly labeling it as incorrect (wimps).

Both Politifact and the AP relied on my analysis, although their judgments are of course their own.

Now the President repeated this falsehood in his post-State of the Union tour this week and the Washington Post called him on it. Here’s Mr. Lane:

But in campaigning for re-election on this aspect of his record, he has shown an unfortunate, and remarkably ungracious, tendency to distort the record of his predecessor.

… President George W. Bush never gave the companies an unconditional bailout. He reluctantly loaned them money in return for what The Detroit Free Press described as “deep concessions” — and he did so in part so that Obama would not have to take office amid a full-blown industrial meltdown.

… On page 42 of his book on the bailout, former Obama auto-czar Steven Rattner praised the “thoughtful” Bush approach, noting that its “conditions — as imperfect as they were — provided a baseline of expected sacrifices that paved the way for our demands for give-ups from the stakeholders.”

What actually happened

In December 2008, after Congress left town without addressing this issue, President Bush had two viable options.

• He could allow market forces to work. GM and Chrysler would run out of cash by early January and a supplier run would begin sometime soon thereafter. The firms would begin liquidating in January with an industry-wide job loss we estimated at about 1.1 M jobs. This was during the late stages of the financial meltdown of 2008. In addition this choice would mean that about a month later President Obama would enter office facing not just a severely weakened economy and financial industry, but an in-progress collapse of the auto industry for which he would have no viable recourse.
• Or President Bush could provide a three-month “bridge loan” to allow President Obama time to get his feet set and decide whether he wanted to provide a longer-term loan to the firms.

President Bush chose the second option. In the final days of December Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5–6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to President Obama’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals.

1. repay the loan and any other government financing;
2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could nevertheless still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:

1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
3. eliminate the jobs bank;
4. develop work rules that are competitive with the transplants by 12/31/09; and
5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by President Obama’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 7 liquidation process. We gave the President’s designee the authority to extend this process for 30 days.

The Bush-era loans were not a blank check, not a “straightforward bailout.” President Obama was wrong when he said they were.

(photo credit: paul bica)